Marcus must reassure investors on policy

JOHANNESBURG – Markets have welcomed the naming of a former deputy governor at South Africa’s central bank as its next chief, but investors will want to see how she balances inflation concerns with the needs of a sickly economy.

Gill Marcus, who becomes governor in November, will quickly need to show she can withstand pressure from powerful labour unions. They have clashed with outgoing Governor Tito Mboweni over demands for steep interest rate cuts to cushion the poor as the economy grapples with its first recession in 17 years.Mboweni’s unexpected departure, after he earlier indicated willingness to serve a third term in office if asked, raises questions over whether the ruling ANC’s leftist allies are gaining momentum in their quest to overturn investor-friendly policies like inflation targeting.President Jacob Zuma said on Sunday Marcus, who has also served as a deputy finance minister, would take over from Mboweni after he said the latter declined a government offer to stay on for another five years.But investors will wonder whether Zuma actually bowed to pressure to remove the hawkish Mboweni – whom unions slammed as arrogant and out of touch with the plight of the poor – and whether this signals a tilt to a more populist monetary policy.’There is unlikely to be a sense of total comfort when it comes to the deeper issues that this move may symbolise,’ said Razia Khan, head of research for Africa at Standard Chartered.’It is well known that unions had been calling for Mboweni to be replaced (and) speculation over whether the left of the party will exert greater influence on future policymaking is likely to persist.’Under Mboweni, the central bank lifted interest rates by 500 basis points between June 2006 and June 2008, to rein in inflation, which has clung above the top end of a 3-6 per cent target band since April 2007.’RATE CUTS NOT ENOUGH’The bank has lopped off 450 basis points since December to help an economy that contracted 6,4 per cent in the first quarter of this year after shrinking 1,8 percent in Q4 2008.But unions say rates remain punitively high, with the poor bearing the brunt, and they were angered by the decision of the central bank’s monetary policy committee, chaired by Mboweni, to leave the key repo rate unchanged at 7,5 percent in June.Marcus, who is seen to have a more dovish leaning, indicated at the weekend she would adopt a style of ‘engagement’ with all interested parties.But a significant tilt in monetary policy at this stage would scare away foreign portfolio flows crucial to South Africa’s infrastructure investment drive.’The rand would depreciate heavily and you could see capital flows into the country slowing down or being reversed,’ said Azar Jammine, director and chief economist at Econometrix.’Suddenly the country is faced with a crisis in terms of financing the infrastructural investment projects that the government intends embarking upon as a means of encouraging job creation during recessionary times.’However Marcus history with the central bank, and her recent stint as chairwoman of South Africa’s largest retail banking group, means she is in tune with the need to reassure investors of policy continuation, some analysts believe.’I don’t think appointing Gill Marcus, somebody who was part of the creation of monetary policy as deputy governor, signals a policy change,’ said Leon Myburgh, sub-Saharan Africa specialist at Citi. ‘I think Marcus will be astute enough to know how far she can go.’London-based Nomura International analyst Peter Attard Montalto felt Marcus missed a key opportunity to reassure markets at a weekend news conference when she gave a non-committal response when asked about inflation targeting.This could partly be because she did not want to upset unions early on and would rather debate the issue first, Attard Montalto said, warning however:’She will have to tread carefully to keep market sentiment onside. Investors may be giving policymakers the benefit of the doubt for the moment, but this is not unconditional.’- Nampa-Reuters